Sunday, September 2, 2018

Six things for extension filers to remember

Oct. 15 is almost here, and it’s the last day to file for most people who requested an automatic six-month extension for their 2017 tax returns. These taxpayers should remember that they can file any time before Oct. 15 if they have all their required tax documents. They can also pay their tax bill in full, or make a partial payment, anytime, by visiting IRS.gov/payments.
As extension filers prepare to file, here are some things they should know:
  • They can still use IRS Free File. Nearly everyone can e-file their tax return for free through IRS Free File. The program is available on IRS.gov now through Oct. 15. IRS e-file is easy, safe and the most accurate way for people to file their taxes. E-file also helps people get all the tax benefits they’re entitled to claim.
  •  A refund may be waiting. Anyone due a refund should file as soon as possible to get their money. The sooner someone files, the sooner they’ll get it. Don’t forget to use Direct Deposit. It is the best and fastest way for taxpayers to get their tax refund electronically deposited for free into their financial account. 
  • They should consider IRS Direct Pay. Taxpayers who owe taxes can pay them with IRS Direct Pay. It’s the simple, quick and free way to pay from a checking or savings account. Taxpayers can just click on the ‘Pay’ at IRS.gov.
  • Here’s what taxpayers should do about a missed deadline. Anyone who did not request an extension by this year’s April 17 deadline should file and pay as soon as possible. This will stop additional interest and penalties from adding up. IRS Direct Pay offers a free, secure and easy way to pay taxes directly from a checking or savings account. There is no penalty for filing a late return for people who are due a refund. 
  • Taxpayers should remember the Oct. 15 Deadline. Taxpayers who aren’t ready to file yet should remember to file by Oct. 15 to avoid a failure-to-file penalty. Taxpayers who owe and can’t pay their balance in full should pay as much as they can to reduce interest and penalties for late payment. They can use the Online Payment Agreement tool to apply for more time to pay or set up an installment agreement. In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty.
  • More Time for the Military.  Members of the military and others serving in a combat zone get more time to file. These taxpayers typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

Tax preparers should encrypt client data

To help protect their clients’ data from cyberthieves, tax preparers should consider encrypting all sensitive data. In fact, encryption protocols should be standard features of any data security plan that must be created by all professional tax return preparers, which is required by the Federal Trade Commission and its Safeguards Rule.

Here are a few basic steps for tax preparers to consider about encryption. These will help protect client data stored on computer systems. Preparers should:
  • Use drive encryption to lock all files on computers and on all devices. Drive or disk encryption often is a stand-alone software product. It converts text in files into an unreadable format for anyone who makes an unauthorized access. Entering the password unlocks the files for legitimate users.
  • Backup encrypted copies of client data to external hard drives or use cloud storage. If using external drives, preparers should keep them in a secure location. If choosing cloud storage, they should encrypt the data before uploading to the cloud.
  • Avoid attaching USB drives and external drives with client data to public computers.
  • Avoid installing unnecessary software or applications to the business network.
  • Avoid offers for “free” software, especially security software. This is often a ruse by criminals.
  • Download software or applications only from official sites.
  • Perform an inventory of devices where clients’ tax data are stored, such as laptops, smart phones, tablets and external hard drives.
  • Take an inventory of software used to process or send tax data, such as systems, browsers, applications, tax software and web sites.
  • Limit or disable internet access capabilities for devices that have stored taxpayer data.
  • Delete all information from devices, hard drives, flash drives, printers, tablets or phones before disposing of devices.
  • Physically destroy hard drives, tapes, USBs, CDs, tablets or phones by crushing, shredding or burning.
  • Shred or burn all documents containing taxpayer information before throwing them away.
The IRS and its partners in the Security Summit are reminding preparers about the importance of strong passwords as part of the Tax Security 101 awareness initiative. This is intended to provide tax professionals with the basic information they need to better protect taxpayer data and to help prevent the filing of fraudulent tax returns.

Taxpayers should be prepared for natural disasters

With hurricane season underway, it’s a good idea for taxpayers to think about what they can do to be prepared should a hurricane or other natural disaster strike where they live. Here are a few helpful tips for taxpayers to keep in mind.

The IRS can help

In the case of a federally declared disaster, taxpayers can call 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Get a copy of a tax return

Taxpayers who need a copy of their prior-year tax return have several options. If they:
  • Went to a paid preparer, they might be able to get a copy of last year’s tax return from that preparer.
  • Used the same tax preparation software this year that they used last year, that software will likely have their prior-year tax return.
  • Didn’t use the same tax preparation software this year, they may be able to return to their prior-year software and view an electronic copy of that return.

Get a Transcript

Taxpayers who are unable to access prior-year tax return using the above methods can get a copy of their transcript by going to IRS.gov and using the Get Transcript application. By selecting “Get Transcript Online,” the taxpayer can immediately view, print or download their transcript. If they prefer to have a copy sent to the address that the IRS has on file, they can select "Get Transcript by Mail." They should receive their transcript in the mail in five to 10 days from the time the IRS receives their request online.

Update emergency plans

Because a disaster can strike any time, taxpayers should review emergency plans annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, they should update plans accordingly. They should also tell employees about the changes.
Individuals and businesses should make plans ahead of time and be sure to practice them.

Create electronic copies of key documents

Taxpayers should keep a duplicate set of key documents in a safe place, such as in a waterproof container and away from the original set. Key documents includes bank statements, tax returns, identification documents and insurance policies.
Doing so is easier now that many financial institutions provide statements and documents electronically, and financial information is available on the Internet. Even if the original documents are provided only on paper, these can be scanned into a computer. This way, the taxpayer can download them to a storage device like an external hard drive or USB flash drive.

Document valuables

It’s a good idea for a taxpayer to photograph or videotape the contents of their home, especially items of higher value. Documenting these items ahead of time will make it easier to claim any available insurance and tax benefits after the disaster strikes.

Following new rules for strong passwords helps preparers protect data

Tax professionals should remember to use strong passwords on their accounts. This will help protect their clients’ data from cyberthieves.
Cybersecurity experts’ recommendations on what constitutes a strong password has recently changed. Here are some of the latest tips for tax professionals to follow when creating passwords to help keep data secure. They should:
  • Opt for a multi-factor authentication process when available. Many email providers now offer customers two-factor authentication protections to access email accounts.
  • Use word phrases that are easy to remember rather than random letters, characters and numbers that are harder to remember. By using a phrase, preparers don’t have to write down the password, which exposes it to more risk.
  • Use strong, unique passwords for all accounts, whether it’s to access a device, tax software products, cloud storage, wireless networks or encryption technology.
  • Use a minimum of eight characters; longer is better.
  • Use a combination of letters, numbers and symbols; something like SomethingYouCanRemember@30!
  • Avoid personal information or common passwords.
  • Change default and temporary passwords that come with accounts or devices.
  • Not reuse passwords. For example, changing Bgood!17 to Bgood!18 is not good enough.
  • Not use email addresses as usernames.
  • Store any password list in a secure location, such as a safe or locked file cabinet.
  • Not disclose passwords to anyone for any reason.
  • Use a password manager program to track passwords, but protect it with a strong password.
The IRS and its partners in the Security Summit are reminding preparers about the importance of strong passwords as part of the Tax Security 101 awareness initiative. This is intended to provide tax professionals with the basic information they need to better protect taxpayer data and to help prevent the filing of fraudulent tax returns.

Here’s what taxpayers do when they have to file a new W-4

The IRS reminds taxpayers to look into whether they need to adjust their paycheck withholding. Taxpayers who do need to adjust their withholding should submit a new Form W-4, Employee’s Withholding Allowance Certificate to their employers. Taxpayers can use the updated Withholding Calculator on IRS.gov to do a quick “paycheck checkup” to check that they’re not having too little or too much tax withheld at work.Among the groups who should check their withholding are:

  • Two-income families
  • People working two or more jobs or who only work for part of the year
  • People with children who claim credits such as the Child Tax Credit
  • People with older dependents, including children age 17 or older
  • People who itemized deductions on their 2017 tax return
  • People with high incomes and more complex tax returns
  • People with large tax refunds or large tax bills for 2017
Here are a few things for taxpayers to remember about updating Form W-4:
  • The Withholding Calculator will help determine if they should complete a new Form W-4.
  • The calculator will help users determine the information to put on a new Form W-4.
  • Taxpayers who use the calculator to check their withholding will save time because they don’t need to complete the Form W-4 worksheets. The calculator does the worksheet calculations.
  • Taxpayers who complete new Form W-4s should submit it to their employers as soon as possible. With withholding occurring throughout the year, it’s better to take this step sooner, rather than later.
As a general rule, the fewer withholding allowances a taxpayer enters on Form W-4, the higher their tax withholding. Entering “0” or “1” on line 5 of the W-4 instructs an employer to withhold more tax. Entering a larger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
Employees who have too little withheld are not paying enough taxes throughout the year, and they may face an unexpected tax bill or penalty when they file next year. People who have too much tax withheld will get less money in their regular paycheck. If those taxpayers change their withholding and enter more allowances on Form W-4, they’ll get more money in their paychecks throughout the year.
Having a completed 2017 tax return and their most recent pay stub can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.

Taxpayers may also need to determine if they should make adjustments to their state or local withholding. They can contact their state's department of revenue to learn more.

Friday, August 3, 2018

Resources on IRS.gov help all taxpayers understand tax reform

IRS.gov is a great place for taxpayers to visit when they have questions about the Tax Cuts and Jobs Act. The legislation, which was passed late last year, includes changes to many areas of the tax law. Here are some of the resources on IRS.gov that will help individual taxpayers, businesses and the tax community understand the law and its effect on their taxes:
  • Tax Reform Web Page. The Tax Reform page highlights what taxpayers need to know about the tax law changes and how these changes affect them. This page also links taxpayers and tax professionals to news releases, tax tips, publications, notices, and legal guidance related to the legislation.
     
  • Updated Withholding Calculator. The IRS encourages everyone to use the Withholding Calculator to perform a “Paycheck Checkup,” which is even more important this year because of the tax law changes. The calculator helps taxpayers determine if they’re having the right amount of tax withheld from their paychecks.
     
  • Updated Form W-4, Employee’s Withholding Allowance Certificate. Taxpayers who determine they need to make changes to their withholding can complete a  Form W-4, which reflects the tax law changes. Employees will submit the completed Form W-4 to their employers.
     
  • Frequently Asked Questions. The IRS posted new FAQs to help people understand how to use the Withholding Calculatorand the changes to the Withholding Tables.

More information about the tax law changes will be coming throughout the year. IRS.gov will be updated to reflect changes as they develop.
 

Tax Security 101: tax preparers should take these steps to protect data

The IRS and its Security Summit partners launched a summertime campaign to remind tax professionals about the importance of data security. This effort is called "Protect Your Clients; Protect Yourself: Tax Security 101."
The IRS released a new, expanded guide with critical steps that tax preparers can take to protect client data. This campaign is intended to provide tax professionals with the basic information they need to better protect taxpayer data and to help prevent the filing of fraudulent tax returns.
Here are some of the steps highlighted as part of Tax Security 101. Tax preparers should:
  • Learn to recognize phishing emails, especially those pretending to be from the IRS, a tax software provider, cloud storage provider or state tax agencies. Never open a link or any attachment from a suspicious email.
  • Create a data security plan using IRS Publication 4557, Safeguarding Taxpayer Data, and Small Business Information Security – The Fundamentals, by the National Institute of Standards and Technology.
  • Review internal controls for their business. Preparers should: 
    • Install anti-malware and anti-virus security software on all devices, such as laptops, desktops, routers, tablets and phones. Keep software set to automatically update.
    • Create passwords of at least eight characters; longer is better. Use different passwords for each account, use special and alphanumeric characters, use phrases, password protect wireless devices and consider a password manager program.
    • Encrypt all sensitive files and emails using strong password protections.
    • Back up sensitive data to a safe and secure external source not connected full time to a network.
    • Wipe clean or destroy old computer hard drives and printers that contain sensitive data.
    • Limit access of taxpayer data to individuals who need to know.
    • Check IRS e-Services account weekly for number of returns filed with EFIN.
  • Report any data theft or data loss to the appropriate IRS Stakeholder Liaison.
  • Stay connected to the IRS through subscriptions to e-News for Tax ProfessionalsQuick Alerts and Social Media.

Tax credits help offset higher education costs

Taxpayers who pay for higher education in 2018 can see tax savings when they file their tax returns. If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.
There are two credits available to help taxpayers offset the costs of higher education. The American opportunity credit and the lifetime learning credit may reduce the amount of income tax owed. Taxpayers use Form 8863, Education Credits, to claim the credits.
The American opportunity credit is:
  • Worth a maximum benefit up to $2,500 per eligible student
  • Only for the first four years at an eligible college or vocational school
  • For students pursuing a degree or other recognized education credential
  • Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.
The lifetime learning credit is:
  • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify
  • Available for all years of postsecondary education and for courses to acquire or improve job skills
  • Available for an unlimited number of tax years
To be eligible to claim the American opportunity credit, or the lifetime learning credit, the law requires a taxpayer or a dependent to have received a Form 1098-T from an eligible educational institution.

What taxpayers should know about amending a tax return

Taxpayers who discover they made a mistake on their tax returns after filing can file an amended tax return to correct it. This includes things like changing the filing status, and correcting income, credits or deductions.
Here are some tips for taxpayers who need to amend a tax return.
  • Complete and mail the paper Form 1040X, Amended U.S. Individual Income Tax Return. Taxpayers must file an amended return on paper whether they filed the original return on paper or electronically. Filers should mail the Form 1040X to the address listed in the form’s instructions. However, taxpayers filing Form 1040X in response to a notice received from the IRS, should mail it to the address shown on the notice.
  • If taxpayers used other IRS forms or schedules to make changes, they should attach those schedules to their Form 1040X.
  • Taxpayers should not amend a tax return to correct math errors; the IRS will make the math corrections for the taxpayers.
  • Taxpayers should also not amend if they forgot to include a required form or schedule. The IRS will mail a request about the missing item.
  • Anyone amending tax returns for more than one year will need a separate 1040X for each tax year. They should mail each tax year’s Form 1040X in separate envelopes.
  • Taxpayers should wait for the refund from their original tax return before filing an amended return. They can cash the refund check from the original return before receiving any additional refund.
  • Taxpayers filing an amended return because they owe more tax should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.
  • Generally, to claim a refund, taxpayers must file a Form 1040X within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax – usually April 15 – whichever is later.
  • Taxpayers can track the status of an amended return three weeks after mailing using “Where’s My Amended Return?” Processing can take up to 16 weeks.

Business owners can visit IRS.gov for resources to help understand tax reform

The IRS reminds business owners with questions about the Tax Cuts and Jobs Act that there are several resources to help answer their questions. The legislation passed in December 2017 changes many areas of the tax law, including some that affect businesses. Here are some of the resources on IRS.gov that can help: 
  • IRS.gov/taxreform. The IRS created the Tax Reform page to highlight what taxpayers need to know about the tax law changes and how they affect taxpayers. This page also links taxpayers, businesses and tax professionals to news releases, recently updated publications, notices, legal guidance, Tax Reform Tax Tips and other resources related to the legislation. 
  • Fact sheets. IRS posts fact sheets on a wide range of topics, including tax reform. The depreciation fact sheet has information about new rules and limitations for depreciation and expensing under the new law. 
  • Publications. To help business owners understand the new law, the IRS has updated several publications, including Publication 15, Circular E, Employer’s Tax Guide.
  • Frequently asked questions. To help employers and taxpayers, the IRS posted FAQs on these topics: 
  • Tax tips. Business owners can subscribe to get tax reform tips and other easy-to-read tax tips by e-mail from the IRS throughout the year.
  • E-News. The IRS issues regular updates on small business topics, including tax reform. It’s easy to subscribe to this email service.  
The IRS will give more information about business-related tax law changes throughout the year. The agency will update IRS.gov/taxreform to reflect changes as they develop. 

Friday, July 6, 2018

Taxpayers with expiring ITINs should take action to avoid issues later

More than 2 million Individual Taxpayer Identification Numbers are set to expire at the end of 2018. Affected taxpayers who expect to file a tax return in 2019 must submit their renewal applications as soon as possible to beat the rush and avoid refund delays next year.
Here are several facts about which ITINs are expiring and how taxpayers renew them:
  • ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2018.
     
  • ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year. An example of this is 9NN-73-NNNN. These numbers need to be renewed even if the taxpayer has used it in the last three years.
     
  • This summer, the IRS is sending the CP-48 Notice , You must renew your Individual Taxpayer Identification Number to file your U.S. tax return, to affected taxpayers with expiring ITINs that have been used at least once in the past three years.
     
  • The notice explains the steps for taxpayers to take to renew the ITIN if they will include it on a U.S. tax return filed in 2019.
     
  • Taxpayers who receive the notice after renewing their ITIN do not need to take further action unless another family member is affected.
     
  • Taxpayers with an ITIN that has middle digits 73, 74, 75, 76, 77, 81 or 82, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time.
     
  • ITINs with middle digits of 70, 71, 72, 78, 79 or 80 have previously expired. Taxpayers with these ITINs can still renew at any time.
     
  • To renew an ITIN, a taxpayer must complete Form W-7 and submit all required documentation.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions should visit the ITIN information page on IRS.gov and take a few minutes to understand the guidelines.

Here’s what you should know about penalty relief

Taxpayers who make an effort to comply with the law, but are unable to meet their tax obligations due to circumstances beyond their control may qualify for relief from penalties.
After receiving a notice stating the IRS assessed a penalty, taxpayers should check that the information in the notice is correct. Those who can resolve an issue in their notice may get relief from certain penalties, which include failing to:
  • File a tax return
  • Pay on time
  • Deposit certain taxes as required
The IRS offers the following types of penalty relief:

Reasonable cause

This relief is based on all the facts and circumstances in a taxpayer’s situation. The IRS will consider this relief when the taxpayer can show they tried to meet their obligations, but were unable to do so. Situations when this could happen include a house fire, natural disaster and a death in the immediate family.

Administrative Waiver and First Time Penalty Abatement

A taxpayer may qualify for relief from certain penalties if he or she:
  • Didn’t previously have to file a return or had no penalties for the three tax years prior to the tax year in which the IRS assessed a penalty.
  • Filed all currently required returns or filed an extension of time to file.
  • Paid, or arranged to pay, any tax due.
Before asking for First Time Abatement relief, taxpayers can request that the IRS first consider the reasonable cause relief provision. This preserves access to the First Time Abatement, which taxpayers may only use every three years.

Statutory Exception

In certain situations, legislation may provide an exception to a penalty. Taxpayers who received incorrect written advice from the IRS may qualify for a statutory exception.
Taxpayers who received a notice or letter saying the IRS didn’t grant the request for penalty relief may use the Penalty Appeal Online Self-help Tool.

What taxpayers should do when a letter arrives this summer

Some taxpayers will receive a letter from the IRS this summer. Taxpayers should not panic and remember that they have fundamental rights when interacting with the agency.
These rights are in the Taxpayer Bill of Rights. Among other things, these rights dictate that letters from the IRS must include:
  • Details about what the taxpayer owes, such as tax, interest and penalties.
  • An explanation about why the taxpayer owes the taxes.
  • Specific reasons about why the IRS may have denied a refund claim.
Taxpayers who receive a letter from the IRS can do some simple things when it arrives. Taxpayers should remember to:
  • Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
  • Compare it with the tax return. If a letter indicates a changed or corrected tax return, taxpayer should review the information and compare it with their original return.
  • Respond. Taxpayers should:
    •  Respond to a letter with which they do not agree.
    • Mail a letter explaining why they disagree.
    • Mail their response to the address listed at the bottom of the letter.
    • Include information and documents for the IRS to consider.
    • Allow at least 30 days for a response.
  • Reply timely if necessary. If a taxpayer agrees with the information, there’s no need to contact the IRS. However, when a specific response date is in the letter, there are two main reasons a taxpayer should respond by that date:
    • To minimize additional interest and penalty charges.
    • To preserve appeal rights if the taxpayer doesn’t agree.
  • Pay. Taxpayers should pay as much as they can, even if they can’t pay the full amount they owe. They can pay online or apply for an Online Payment Agreement or Offer in Compromise.
  • Contact the IRS if necessary. For most letters, there’s no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can call the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.
  • Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.

How do taxpayers protect themselves from scammers

Knowledge is power, especially when it comes to avoiding tax scams. Here’s what taxpayers need to know to determine whether an encounter — in person, over the phone or by email — is an imposter or an actual IRS employee:

The IRS Does Not:

  • Call to demand immediate payment using a specific payment method, such as a prepaid debit card, gift card or wire transfer.
  • Demand taxpayers pay taxes without the opportunity  to question or appeal the amount owed.
  • Threaten to bring in local police, immigration officers or other law enforcement to have someone arrested for not paying.
  • Threaten to revoke someone’s driver’s license, business licenses or immigration status.

The IRS Does:

  • In general, first mail a bill to any taxpayer who owes taxes.
  • Normally initiate contact with taxpayers through mail delivered by the United States Postal Service.
  • Present official identification when visiting a taxpayer. Taxpayers have the right to see these credentials, and – if they would like – the representative will provide them with a dedicated IRS phone number for verifying the information and confirming their identity.
  • Call or visit a home or business under certain circumstances. This includes when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or criminal investigation. Even then, taxpayers will generally receive several letters from the IRS in the mail first.
  • Assign certain cases to private debt collectors, but the IRS gives written notice to the taxpayer and their appointed representative before contact from a private collection agency.
  • Offer several payment options. Payment by check should be payable to the U.S. Treasury and sent directly to the IRS, not a private collection agency.

Taxpayers who owed tax this year should check their withholding soon

Taxpayers who owed additional tax when they filed their federal return earlier this year should do a “paycheck checkup” as soon as possible. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help these taxpayers do a checkup and avoid another possibly bigger tax bill next year.
Following the Tax Cuts and Jobs Act, which was passed last year, there are many changes to the tax law that could affect these taxpayers. Doing a checkup now will help them make sure their current tax withholding is in line with their 2018 tax situation.
Here are some things for these taxpayers to keep in mind:
  • These taxpayers may not have had enough taxes withheld from their pay throughout 2017, causing them to owe in 2018.
  • If they continue to have too little withheld from their paychecks the rest of this year, they could find themselves in the same situation again next year.
  • They might even end up with a larger tax bill when they file their 2018 return next year.
  • It’s important to remember that if a taxpayer underpays their tax too much, penalties and interest can apply.
  • The Withholding Calculator can help taxpayers apply the new law to their situation. The results from the calculator can help them make an informed decision about whether to change their withholding this year.
  • These taxpayers need to adjust their withholding as soon as possible for an even withholding amount throughout the rest of the year.
  • Waiting means there are fewer pay periods to withhold the necessary federal tax, which could have a bigger effect on each paycheck.
  • Taxpayers with more complex situations might find that using Publication 505 is a better option for figuring their withholding than using the Withholding Calculator. Publication 505 works better for employees who owe self-employment tax, the alternative minimum tax, or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties.

Friday, June 1, 2018

Tips for Taxpayers Who Need to Amend a Return

Taxpayers who discover they made a mistake on their tax returns after filing can file an amended tax return to correct it. This includes changing the filing status and dependents, or correcting income, credits or deductions. The instructions for Form 1040X, Amended U.S. Individual Income Tax Return, list more reasons to amend a return. Taxpayers should not file an amended return to fix math errors, because the IRS will correct those.
Here are some tips on how a taxpayer amends a tax return. Taxpayers should:
  • Complete and mail the paper Form 1040X, Amended U.S. Individual Income Tax Return, to correct errors to an original tax return the taxpayer has already filed. Taxpayers can’t file amended returns electronically and should mail the Form 1040X to the address listed in the form’s instructions. However, taxpayers filing Form 1040X in response to a notice received from the IRS, should mail it to the address shown on the notice.
  • Prepare Form 1040X. Many taxpayers find the easiest way to figure the entries for Form 1040X is to make the changes in the margin of the original tax return and then transfer the numbers to their Form 1040X indicating the year they are amending.  Use the second page of Form 1040X in Part III to explain the changes.
  • Know when not to amend. Aside from math errors, taxpayers also do not need to amend their return if they forgot to include a required form or schedule. The IRS will mail a request to the taxpayer, if needed.
  • Use separate forms for each tax year. Taxpayers amending tax returns for more than one year will need a separate 1040X for each tax year. Mail each tax year’s Form 1040X in separate envelopes. 
  • Wait to file for corrected refund for tax year 2017. Taxpayers should wait for the refund from their original tax return before filing an amended return. It is okay to cash the refund check from the original return before receiving any additional refund. 
  • Pay additional tax. Taxpayers filing an amended return because they owe more tax should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.
  • File within three-year time limit. Generally, to claim a refund, taxpayers must file a Form 1040X within three years from the date they timely filed their original tax return or within two years from the date the person pays the tax – usually April 15 – whichever is later. 
  • Track an amended return. Taxpayers can track the status of an amended return three weeks after mailing using “Where’s My Amended Return?” Processing can take up to 16 weeks.

More Information:

IRS YouTube Videos:

Plan ahead for vacation home rentals

During the summer, taxpayers often rent out their property. They usually think about things such as cleanup and maintenance, but owners also need to be aware of the tax implications of residential and vacation home rentals.
If taxpayers receive money for the use of a house that’s also used as a taxpayer’s personal residence, it generally requires reporting the rental income on a tax return.
  • Vacation Home. This may be a house, an apartment, condominium, mobile home, boat, vacation home or similar property. It's possible to use more than one unit as a residence during the year.
  • Used as a Home. When the property is used as a home, the rental expense deduction is limited. This means the rental expenses cannot be more than the rent received.
  • Personal Use. Personal use means use by the owner, owner’s family, friends, other property owners and their families. Personal use includes anyone paying less than a fair rental price.
  • Divide Expenses. Generally, special rules apply to the rental expenses of a property used by the taxpayer as a residence during the taxable year. Usually, rental income must be reported in full, and any expenses need to be divided between personal and business purposes. 
  • How to Report. Taxpayers use Schedule E to report rental income and rental expenses. Rental income may also be subject to Net Investment Income Tax
  • Special Rules. If the home unit is rented out fewer than 15 days during the year, none of the rental income is reportable and none of the rental expenses are deductible. 

More Information:

  • Tax Topic 415 – Renting Residential and Vacation Property
  • Publication 527, Residential Rental Property (Including Rental of Vacation Homes)

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Special Tax Benefits for Armed Forces

Members of the military and their families are often eligible for certain tax breaks. For example, members of the armed forces don’t have to pay taxes on some types of income. Special rules could also lower the tax they owe or give them more time to file and pay taxes.
No matter what time of the year, it’s good for members of the military and their spouses to familiarize themselves with these benefits. Here are some things for these taxpayers to know about their taxes:
  • Combat Pay Exclusion. If someone serves in a combat zone, part or even all of their combat pay is tax-free. This also applies to people working in an area outside a combat zone when the Department of Defense certifies that area is in direct support of military operations in a combat zone. There are limits to this exclusion for commissioned officers.
  • Deadline Extensions. Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  • Earned Income Tax Credit. If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax or get a larger refund.
  • Signing Joint Returns. Normally, both spouses must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
  • ROTC Allowances. Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.

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Tips for teenage taxpayers starting a summer job

Now that school’s out, many students will be starting summer jobs…from working at a summer camp to being an office intern. The IRS reminds students that not all the money they earn may make it to their pocket. That’s because employers must withhold taxes from the employee’s paycheck. Here are a few things these workers need to know when starting a summer job:
  • New employees. Students and teenage employees normally have taxes withheld from their paychecks by the employer. When a taxpayer gets a new job, they need to fill out a Form W-4. Employers use this form to calculate how much federal income tax to withhold from the employee’s pay. The Withholding Calculator on IRS.gov can help a taxpayer fill out this form.
     
  • Self-employment. Students who do odd jobs over the summer to make extra cash – like baby-sitting or lawn care – are considered self-employed. They should remember that money earned from self-employment is taxable. Workers who are self-employed may be responsible for paying taxes directly to the IRS. One way to do that is by making estimated taxpayments during the year. Taxpayers who do this should keep good records of all money they receive.
     
  • Tip income. Someone working as a waiter or a camp counselor who receives tips as part of their summer income should know that tip income is taxable income and subject to federal income tax. They should keep a daily log to accurately report them, as they will report tips of $20 or more received in cash in any single month.
     
  • Payroll taxes. This tax pays for benefits under the Social Security system. While taxpayers may earn too little from their summer job to owe income tax, employers usually must still withhold Social Security and Medicare taxes from their pay. If a taxpayer is self-employed, then Social Security and Medicare taxes may still be due and are generally paid by the taxpayer.
     
  • Reserve Officers' Training Corps pay. If a taxpayer is in an ROTC program, active duty pay, such as pay for summer advanced camp, is taxable. Other allowances the taxpayer may receive – like food and lodging allowances paid to ROTC students participating in advanced training - may not be taxable. The Armed Forces' Tax Guide on IRS.gov has more details.

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Tips on income taxes and selling a home

Taxpayers who sell a home may qualify to exclude from their income all or part of any gain from the sale. Below are some things taxpayers should keep in mind when selling a home:
Ownership and use. To claim the exclusion, the homeowner must meet the ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have:
  • Owned the home for at least two years.
  • Lived in the home as their main home for at least two years.
Gain. Taxpayers who sell their main home and have a gain from the sale may usually be able to exclude up to $250,000 from their income or $500,000 on a joint return. Homeowners who can exclude all of the gain do not need to report the sale on their tax return.
Loss. Taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.
Reported sale. Taxpayers who cannot exclude the gain from their income must report the sale of their home on a tax return. Taxpayers who choose not to claim the exclusion must report the gain on a tax return. Taxpayers who receive a Form 1099-S, Proceeds from Real Estate Transactions, as part of the real estate transaction must also report the sale on their tax return.
Mortgage debt. Some taxpayers must report forgiven or canceled debt as income on their tax return. This generally includes people who went through a mortgage workout, foreclosure, or other process in which a lender forgave or canceled mortgage debt on their home. Taxpayers who had a written agreement for the forgiveness of the debt in place before January 1, 2017, might be able to exclude the forgiven amount from income.
Possible exceptions. There are exceptions to these rules for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others.
Worksheets. Worksheets included in Publication 523, Selling Your Home, can help taxpayers figure the:
  • Adjusted basis of the home sold.
  • Gain or loss on the sale.
  • Excluded gain on the sale.
Multiple homes. Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.
Tax credit. Taxpayers who claimed the first-time homebuyer credit to purchase their home have special rules that apply to the sale. Taxpayers can use the First Time Homebuyer Credit Account Look-up to get account information, such as the total amount of their credit or repayment amount.

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